In the last four years, the US economy has posted its best performance since the sixties. What is the connexion between the formidable boom in the real economy and the historically unprecedented bubble on the stock market? Could the inflation of asset values far beyond the rise in corporate earnings be preparing a Japanese-style nemesis?

ROBERT BRENNER

THE BOOM AND THE BUBBLE

Two years ago, in autumn 1998, the international economy appeared to be in profound difficulty. The crisis that had broken out in East Asia in summer 1997 was in the process of engulfing the rest of the world. Stock markets and currencies had crashed outside the capitalist core. Russia had declared bankruptcy. Brazil was falling into depression. The Japanese economy had slipped back into recession. The American economy was not immune. In response to falling profits during the first half of 1998, especially in the still pivotal manufacturing sector, equity prices fell alarmingly from July through September. By October, a severe liquidity crunch threatened to plunge the US—and thereby world—economy into the danger zone. At that point, however, the Federal Reserve intervened. It bailed out the huge Long Term Capital Management hedge fund, on the grounds that, had it been allowed to fail, the international economy risked financial collapse; and lowered interest rates on three successive occasions, not only to counter the credit squeeze, but also to make crystal clear that it wanted equity prices to rise, to subsidize the consumption needed to keep the international economy turning over.